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Lonmin can resist Xstrata advances, for now

Xstrata has long been considered a private equity house in miner's clothing. Now it's taking on the role of activist investor, too. The miner owns 25 per cent of struggling platinum producer Lonmin, and is being far from supportive in its role as a lead shareholder. Lonmin says Xstrata will back the company's $817-million emergency rights issue but only if it gets to hand-pick a new CEO and other top managers. Lonmin is rejecting those demands and for now, it can afford to.

It's easy to see why Xstrata feels frustrated. It acquired its stake after Lonmin had beaten back an initial takeover attempt in 2008. Last month, Xstrata sought control again, in return for transferring some platinum and chrome assets to Lonmin and underwriting a $1-billion rights issue that was designed to alleviate financial strain after deadly strikes in South Africa shut production in August. That would have left Xstrata holding 70 per cent. But Lonmin snubbed that, arguing the offer didn't create value for all shareholders.

Lonmin certainly looks vulnerable. In addition to the damage from the strikes, Lonmin CEO Ian Farmer has been sidelined by illness since August. Xstrata must be hoping that by throwing down the gauntlet to Mr. Farmer's stand-ins, it will encourage other big shareholders to come out publicly in favour of management change before investors vote on the rights issue on Nov. 19. Some 50 per cent of voting shareholders would have to say no to sink it.

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But voting down the rights issue would be risky. Together, the capital infusion and rejigged debt covenants should give Lonmin the headroom it needs to pay down debt and keep operations going until market conditions improve. But the amended debt terms are contingent on the rights issue passing. Assuming it does, the deep discount attached to the capital raise – pitched 44 per cent below the London-listed Lonmin shares' theoretical ex-rights price – means most shareholders will probably go along with it. And even if they don't, the underwriters will cover the shortfall.

That makes it easy to see why Lonmin has rebuffed Xstrata's latest advance. But whether or not Xstrata succeeds this time, it has laid down a marker. After this battle, Lonmin management will be under even more pressure to convince shareholders that it has a plan for reviving its fortunes once the immediate crisis passes and that it shouldn't try to coax Xstrata into making a proper offer.

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